Monday, October 31, 2011

Our likable Prime Minister, John Key, does not need to concern himself with the cost of living.---------------------------------------------------------

The issue of greed and poverty seems to be becoming a topic of interest in New Zealand, and certainly the rest of the industrialised world. It's being pushed by working class heroes like Gareth Morgan, and others. But they all seem to promote the same simple (and questionable) solution: Tax the rich and give to the poor - the "Robin Hood" solution.

In my Explaining New Zealands Property Disaster I made the point that one of the most sure-fire ways to create a poverty class is to facilitate an under-supply of what is essential. Our core essentials are of course housing and food. My point is that you can also achieve the opposite (anti-poverty) by facilitating an over-supply of what is essential.By definition people do not compromise on what is essential. This is why prices for essentials are so vulnerable to severe hikes resulting from under-supplies. An under-supply of houses or food tends to bid up the price to whatever the market can afford, as buyers must aggressively compete amongst each other to avoid being the guy who misses out. But when you facilitate a mild glut then the opposite can occur, as sellers must compete amongst themselves to avoid being the guy who can't sell (or rent out) their property. And so, with an over-supply, the price is essentially driven down to what the bottom of the market can afford. A form of egalitarianism? Sure!Likewise, if the bottom of the market can only afford to pay, say, $100pw rent for their home, then generally that is what the rent for simple houses will fall to; because, again, in the context of a glut it's the seller who is struggling to not miss out, and they will always prefer to rent their property out for something rather than nothing.Now look at the New Zealand Green party. Their leader, Metiria Turei, recently stated that the most important issue for New Zealand right now is housing affordability. Wonderful! I could not agree more with her on that. But their party currently promotes the idea of increasing the minimum wage, while at the same time they promote the idea of forced urban intensification (commonly termed: Smart Growth); that latter of which is, bluntly, housing under-supply policy. So what would the effect be of these combined policies?The increased minimum wage will simply translate to higher rents - 'Robin Hood' style wage hikes will bounce back to where they don't belong. In New Zealand we have a serious under-supply of houses so rents are set to whatever the market can afford. If renters come to afford more via a minimum wage hike, then it will be the landlord's who finally get the booty.So what is the best policy for getting rid of poverty in New Zealand? Well, policy that works to ensure an adequate supply of the essentials is not just a method, it is a PREREQUISITE. Until these working class heroes start talking about abundant housing and food supply they are wasting their time. The supply issue must come before anything else.There are many things you can do to ensure an abundance of good food and housing to drive the base cost of living down. And doing this is intrinsically easy in a country like New Zealand because it is industrialised and very well endowed with basic resources. However, I don't want to focus on those details here. I want to ask the question of why it's not actually happening.

---------------------------------------------------------Resistance to change: What would happen if good food and housing were cheap?

This is an interesting question, and here we can see some of the incentives to not let it happen. That is, the incentives to deliberately keep people struggling to make ends meet. My focus on this issue will be for housing because this is the 'killer' living cost for New Zealand right now.Firstly, we need to model what would happen if houses fell back to their "real" non-inflated value of about $200k a unit, rather than $450k+ per unit.

The Banks:

These guys would have a heart attack. All those mortgages held by people who will not be in the black for many years. How many of those mortgage holders would just declare bankruptcy and hand their toxic liability back to the banks? Maybe thousands?

And then if a given bank ultimately fails then maybe they would somehow infiltrate government and force a bailout by getting everyone to believe that an isolated bank failure will lead to the implosion of the entire financial system (as in the USA show)? Regardless, insofar as bank power translates to political power (and I'm not sure if or how much they can/do), we can see that there would be no "political" incentive for a correction in the property market, and instead staunch resistance to it.What's more the banks of course want to sell the largest mortgages they can, so naturally they want people in debt up to their eyeballs - that's their business. And that requires costly homes and therefore artificially inflated land prices.

Government: These guys would freak out too, insofar as they care about winning another political term.

Remember that before people can pay down their mortgage they have to earn money that they get taxed on, and when the cost of living is high so must your income be high. If houses and food were cheap then people wouldn't have to work so many hours, and that means (potentially) a major reduction in the tax base.

The only solution to this "problem" is a reduction in services and government bureaucracy. Government must shrink. And when you already have a huge public sector in a finely balanced democracy (New Zealand's current situation) your mass public-sector job cuts will almost certainly ruin your chances of winning the next election.Also, New Zealand has a rapidly growing national debt. This debt needs to be serviced, so that is another concern relating to a shrinking tax base.Business status quo:

Though start-ups that are not dependant on local markets (exporters) are generally repelling by costly industrial/commercial land and a high cost of living, business status quo will generally like it.Business with land assets will want their land value to maintain its inflated status. Extra costs, in all forms, will ultimately be passed on to the consumer. So these guys would understandably lobby government to keep land inflated. This especially applies to landlords. Indeed, I would imagine that the Auckland council, which is currently pushing a high-density (land-restricting) "vision" onto Aucklanders, will probably get most of their submissions in support of their plans from landlords.Another fundamental is that as people don't have to work so hard there will be a net reduction of economic activity alround, as people trade work/consumption for more spare time as they can redefine their work-life balance. This dynamic alone can lead to effective oversupplies which can ruin the profitability of business status quo, up until they and/or their competitors recede to the adjusted demand. This adjustment scenario is great for consumers, but not business status quo.

Note: I should also point out that if you had a major reduction in economic activity then you will of course have many job losses. This can be devastating for people who are mortgaged up to the limit. Hence, we get more political pressure to keep the property market inflated. With this property disaster we have created for ourselves things have become difficult and precarious.---------------------------------------------------------

Conclusion:

It's quite simple. By making the base cost of living low you take the New Zealand economy, and New Zealand in general, back to the 1950's - a time when we had small government, only Dad had to work, minimal personal and nearly no national debt, as many kids as you would sanely want, and no need for a massive welfare system; and also less people getting [materially worthless] degrees only because they're desperate for an income that might buy them a home. Only it would be a better and more efficient New Zealand due to the virtues of modern systems and technologies.As you can see Reader, you are a tax slave and a debt slave. You function to serve the interests of the status quo, and no doubt you will continue to do so because you're just too busy trying to survive to learn about who's pulling one over on you and why. Your ability to 'escape' has been reduced by the assault on the base cost of living that has been going on for decades now. This especially applies to generation-Y and onwards. Alas, it's just so easy to screw-over the naive.

....But then if you are young, you're not thinking of having too many of those expensive kids, are you? I mean you can barely even afford the rent! (The ultimate objective behind it all may be population control, as I have periodically suggested on this blog). And if you do have kids then the government will be bringing them up; because they're off to a daycare centre because your wife has to go out to work. I wonder what your little Johnny will achieve there... No doubt they will grow up to work even harder than you have to - full of "aspiration" and work "ethic". They will sure as hell need to be!

---------------------------------------------------------Addition: 19-11-11:I wish to include David Willmott's excellent statement relating to housing affordability in Auckland, also included in my Explaining New Zealand's property disaster.

It's sad, but New Zealander's are so drunk on misinformation and trite from the mainstream media that the majority of Aucklander's will never come to understand what is killing their city. And so they will keep voting for well supported but hapless fools like Len Brown instead.*****Are you a New Zealander? If so then I urge to you to forward David's talk to your friends and contacts - Hey it's just a couple of clicks! He says it so well and it's just so important.

John Key came out of poverty, it's funny how people forget that. The cost of living will never go back to the "50's" and here is why. For one thing you now have, not 1, but 2 phones 'you have to' pay for. You have the internet, gaming devices, cable television and all these fancy gadgets and gizmos that is meant to make your life easier but doesn't. People say they can't afford housing, but even the standards of that has gone up, no one wants to live in 'state housing' anymore and why is that? It's rubbish.

The price of living hasn't gone up anymore than wages has, it's the standard of living that's risen and expectation among other things like tertiary education. People used to pick up trades at the drop of the hat back in my day, get a weeks training or so and you'd be on your way. Now you have to have a piece of paper earned after four years to get entry level. It's crazy!

As for John Key, psychologically he probably still is living in poverty (our childhoods get imprinted) which is why he's so obsessed with wealth.

I agree on the exaggerated investment in education, in fact I think it's the expanded welfare state in disguise. But housing has been radically inflated in terms of real prices. Those fancy electric gadgets are not *that* expensive.

Did you see this: http://andrewatkin.blogspot.co.nz/2013/03/the-real-deal-housing-in-new-zealand.html

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The Great New Zealand Housing Disaster: Click on The Real Deal, below.

Why would you buy a home for $500k when you can build a new home for $200k at the city fringe? Answer: Because you can't build a home for $200k at the city fringe. Because the cost of land has been artificially inflated, and to the point of ridiculous. This is the heart of the reason why housing in New Zealand has been able to inflate to such extraordinary degrees. The supply response to increases in demand has been deliberately choked off. At base, this so-called complex issue really is that simple.